In what seemed to be a populist interim budget 2019, the finance minister presented two significant tax sops for the middle class, salaried individuals, pensioners and senior citizens. The Finance Bill 2019, which will be applicable from fiscal year 2020, increased the tax rebate amount to ₹12,500 for taxable income up to ₹5 lakh, making it completely tax-free, and increased standard deduction for the salaried class from ₹40,000 to ₹50,000.
Contrary to expectations, finance minister Piyush Goyal didn’t tinker with tax slabs or exemption limits. So, if you are below 60 years of age, the exemption limit continues to be ₹2.5 lakh, which means you don’t pay any tax on ₹2.5 lakh of your income. Subsequently, you pay tax at the rate of 5% for taxable income between ₹2.5 lakh and ₹5 lakh, 20% for income between ₹5 lakh and ₹10 lakh and 30% for income above ₹10 lakh. Add to this, an education cess of 4% and a surcharge for income above ₹50 lakh.
But, a rebate of ₹12,500 will mean that if your taxable income is up to ₹5 lakh, you don’t pay any tax, because the total tax liability up to this income threshold is ₹12,500 only.
Currently, a rebate of ₹2,500 is applicable for incomes up to ₹3.5 lakh that makes taxable income up to ₹3 lakh tax-free. “Note that the government has not increased the exemption limit to ₹5 lakh. So the tax rate of 5% for income slab between ₹2.5 lakh and ₹5 lakh for non-senior tax payers still applies. So, if your taxable income is ₹5.25 lakh, tax without cess will be ₹17,500 (5% of ₹2.5 lakh that falls in the first tax slab and 20% of ₹25,000 that falls in the next slab)," said Kuldip Kumar, partner and leader, personal tax, PwC India.
While the rebate is applicable only on individuals with taxable income up to ₹5 lakh, those who earn more can also benefit if deductions are included. A deduction reduces taxable income, bringing down total tax liability. “The most common deductions are ₹1.5 lakh under section 80C, deduction of health insurance premium of ₹25,000 for self, spouse and children and another ₹50,000 for senior citizen parents, deduction of up to ₹2 lakh for interest payment on a home loan for self-occupied property and ₹50,000 extra deduction for the National Pension System. There is also a deduction of ₹10,000 on interest on savings bank or post office deposits. Add to this, the standard deduction of ₹50,000. If somebody avails all these deductions, gross income up to ₹10.35 lakh will be tax-free as the deduction will bring down the taxable income to ₹5 lakh," said Homi Mistry, partner, Deloitte India.
For salaried individuals, the budget proposes to increase standard deduction from the current ₹40,000 to ₹50,000. A standard deduction too reduces your taxable income. Increase of standard deduction limit by ₹10,000 will result in tax savings of ₹3,120 for individuals in the highest tax bracket of 31.2%, excluding surcharge. Those paying highest surcharge of 15% for incomes above ₹1 crore will save ₹3,588 in tax. “The tax proposals are aimed to please the middle class and the pensioners. The maximum tax savings from the enhancement in standard deduction is ₹3,588 which is not significant," added Mistry.